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Closing tax loophole could mean millions for Alaska's coffers

Posted: Wednesday, April 03, 2002

Legislators who are looking for new state revenue sources may want to examine what amounts to a major loophole in Alaska's existing tax structure.

Alaska has approximately 5,800 companies organized as what are known in accounting and legal circles as ''S corporations.'' It also has about 6,500 of what are officially designated as ''C corporations.''

The difference is significant.

The state's tax laws allow S corporations to escape paying taxes on their earnings in Alaska. By contrast, C corporations pay a full measure of income taxes totaling in the millions of dollars.

Most corporations choose one organization or the other, though there are a few other options like limited liability companies, known as LLCs.

C corporations are a taxable entity and pay income taxes both to the state and federal government. But when a company is organized as an S corporation, the earnings are counted as income to its shareholders, not to the corporation as a whole.

The S corporations do not pay any corporate income tax, either on the state or the federal level. That's not a problem for the federal government since it taxes the income through the federal personal income tax.

But since Alaska has no personal income tax, the earnings of S corporations are essentially tax-free.

Some of the larger companies operating in Alaska are S corporations and a number of them are based outside the state. The difference amounts to a huge loophole through which Alaska is losing millions in potential tax revenue, in some cases to non-residents.

Alaska is not the only state that does not have a personal income tax. But most other states in that situation close the loophole by levying an alternative tax against S corporations, a tax that overall captures close to the amount they would be paying if organized as C corporations.

The amount of money escaping state taxes through this loophole is difficult to determine without an investigation by the Alaska Department of Revenue.

Considering that the total could be in the millions, such an investigation would seem worthwhile.